A question answered by American Dental Sales

Nov. 16, 2009

DentistryIQ.com recently received a question regarding the value of the patient base during the sale of a dental practice. The team at American Dental Sales (ADS) specializes in practice transitions, and Peter Ackerman, a principal of The Dental Marketplace and past president of American Dental Sales, agreed to address Dr. Frederick Young’s question.

Here is Dr. Young’s question.

Dear DentistryIQ.com,
I would like to ask how to determine the value of the patient base in a dental practice. If I were to sell my patients to another dentist rather than having a dentist take over the entire practice, building, and equipment, what value would each patient have? One would have to take into consideration each type of patient — the types based on appointment record, payment record, etc. I also would ask you to address the tax implications in this type of sale.

Frederick L. Young, DDS
Eagle River, WI

Mr. Ackerman’s reply:

Doctor Young:

We first need to determine whether you are looking for a “fair market value” or a “liquidation value.”

Fair market value of a dental practice is typically calculated by using three methodologies: income approach, market approach, and asset approach. The value is often tied to the income stream a practice generates. The tangible assets typically hold relatively little value compared to the income-generating intangible assets. Therefore, the fair market value of a dental practice sold with or without equipment would arguably be and often is the same value.

However, it is not unusual for a purchaser to only want to give value for the patients. This value is defined as liquidation value. Liquidation is the practice’s lowest value, and often a seller’s last attempt to obtain some residual value for a practice that is unable to be sold at “fair market value.”

In this instance the practice owner would want to obtain an opinion of fair market value, and reduce the appraisal by the value of the tangible assets to reach a liquidation value of the “goodwill.”

It would be impossible to comment on the tax treatment without further information: selling entity (sole proprietor, C Corp, S Corp, LLC, etc.), the structure of the sale, and the historical operations of the practice.

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